Yahoo Finance Stericycle, Inc. (NASDAQ:SRCL) Q1 2024 Earnings Call Transcript
Stericycle, Inc. (NASDAQ:SRCL) Q1 2024 Earnings Call Transcript April 25, 2024
Stericycle, Inc. beats earnings expectations. Reported EPS is $0.57, expectations were $0.53. Stericycle, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by and welcome to the Q1 2024 Stericycle Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Ellis, Senior Vice President of Finance.
Andrew Ellis: Good morning and thank you for joining Stericycle's 2024 First Quarter Earnings Call. On the call today will be Cindy Miller, our Chief Executive Officer; Janet Zelenka, our Chief Financial Officer and Chief Information Officer; and Cory White, our Chief Commercial Officer. The discussion today includes forward-looking statements that involve risks and uncertainties. When we use words such as believes, expects, anticipates, estimates, may, plan, will, goal or similar expressions, we are forward-looking statements. Forward-looking statements are prospective in nature and are not based on historical facts, but rather on current expectations and projections of our management about future events and are, therefore, subject to risks and uncertainties.
Our actual results could differ significantly from those described in such forward-looking statements. Factors that could cause our actual results to differ are discussed in the Safe Harbor statement in our earnings press release and in greater detail within the risk factors and our filings with the US Securities and Exchange Commission. Our past financial performance should not be considered a reliable indicator of our future performance, and investors should not use historical results to anticipate future results or trends. We disclaim any obligation to update or revise any forward-looking statements other than in accordance with legal and regulatory obligations. On the call, we will discuss nonfinancial measures. For additional information and reconciliation to the most comparable US GAAP measures, please refer to the schedules in our earnings press release, which can be found on Stericycle's Investor Relations website at investors.stericycle.com.
The prepared comments for today's call correspond to an earnings presentation, which is also available at Stericycle's Investor Relations website. Throughout the call, we will reference specific slides from the presentation. This call is being recorded, and a replay will be available approximately one hour after the end of the conference call today until May 25th, 2024. A replay of the webcast will also be available on Stericycle's Investor Relations website. Time-sensitive information provided during today's call, which is occurring on April 25th, 2024, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Stericycle is prohibited.
I'll now turn the call over to Cindy.
Cindy Miller: Thank you, Andrew. Good morning, everyone. On today's call, I will walk through highlights of our first quarter results. Cory and I will provide an update on our key business priorities and Janet will cover our financial performance. We are pleased with our first quarter results. Adjusted earnings per share was $0.57, an $0.08 improvement and adjusted EBITDA was $116.2 million, a $4.9 million improvement over the first quarter of 2023. These improvements were driven by disciplined execution across our key priorities and we are on track to achieve our guidance for full year 2024. First quarter revenues were in line with our internal expectations. Regulated Waste and Compliance Services organic revenues grew for the eighth consecutive quarter, mainly driven by growth in our hospital customers, which is being partially offset by a reduction in the national account footprint we serve as we have outlined on previous earnings calls.
Secure Information Destruction performed as expected, mainly due to year-over-year anticipated headwinds in commodity indexed revenues in the first half of 2024, as we mentioned in our prior earnings call. I will now turn the call over to Cory to provide an update on our first new key business priority, commercial and service excellence.
Cory White: Thank you, Cindy. As a reminder, the three pillars of commercial and service excellence are sales, service and product excellence. Today, I would like to provide an update on our latest initiative in product excellence, which focuses on developing and launching enhanced solutions. We recently launched our Shred-it ProtectPLUS service for our Secure Information Destruction business, which provides regularly scheduled paper shredding service and bundles customizable tiers of cybersecurity and privacy awareness training. This offering promotes compliance, helps maintain brand reputation and provides predictable monthly subscription, billing enabled by capabilities that were delivered with our latest ERP deployment last fall.
ProtectPLUS aligns with ongoing customer feedback and our annual Shred-it data protection report which surveys over 1,500 small business leaders and consumers. In this year's survey, more than 90% of small business leaders reported that data and information protection and compliance training are an essential security practice, yet only 15% reported that they provided employees with training. This differentiated product addresses this specific need in the marketplace. ProtectPLUS is our first subscription-based offering for Secure Information Destruction, small and medium-sized business customers, which bundle service stops with compliance-based tools similar to our Steri-Safe offering for our regulated waste customers. Although early days, we have already generated approximately $2 million in annualized revenues with new customers only.
I will now turn the call back to Cindy for an update on our other key business priorities.
Cindy Miller: Thank you, Cory. Turning to our second key business priority. Operational excellence, we are focusing on driving margin expansion. First, we have completed the workforce management actions that we discussed on the February 2024 earnings call, which included targeted reductions in headcount in the fourth quarter of 2023 and first quarter of 2024, along with continued careful hiring and managing attrition that began in 2023. From these actions, we are on track to realize an estimated $40 million to $45 million of in-year cost savings. Second, the construction phase of our newest medical waste incinerator facility in McCarran, Nevada remains on track to be completed in the second quarter of 2024, at which point we will begin the testing phase.
We are also building the capability to process sorted office paper at this location and expect to begin shredding paper later this year. Third, we continue to make progress on our routing optimization initiative across both core businesses, which has been enabled by our ERP. In North America, producing routes has allowed us to eliminate approximately 5% of our North America fleet, which is a reduction of about 200 vehicles over the last 15 months. I will now turn the call over to Janet to discuss our financial results in more detail.
Janet Zelenka: Thank you, Cindy. I will start by summarizing our first quarter financial results. As noted on Slide 6, revenues in the first quarter were $664.9 million compared to $684.3 million in the first quarter of 2023. The decrease was mainly due to divestitures of $17.7 million, which was partially offset by favorable foreign exchange rates of $2.8 million and an acquisition of $0.9 million. Organic revenues in Regulated Waste and Compliance Services grew $9 million, while Secure Information Destruction organic revenues declined $14.4 million. Secure Information Destruction was mainly impacted by lower commodity index revenues due to lower recycling revenues and lower fuel and environmental surcharges of $19.8 million which were partially offset by higher service revenues of $5.4 million.
As noted on Slide 7, Regulated Waste and Compliance Services revenues were $447.8 million compared to $451.3 million in the first quarter of 2023. Excluding the impact of divestitures, foreign exchange rates and an acquisition, organic revenues increased 2.1% in the first quarter. In North America, Regulated Waste and Compliance services organic revenues increased $7.1 million or 1.9%, mainly driven by price. International Regulated Waste and Compliance Services organic revenues increased $1.9 million or 3% mainly driven by price. Secure Information Destruction revenues were $217.1 million compared to $233 million in the first quarter of 2023. Excluding the impact of divestitures, foreign exchange rates and an acquisition, organic revenues decreased 6.3%, mainly due to lower commodity index revenues, reflecting about an $80 reduction per ton in sorted office paper pricing year-over-year.
In North America, Secure Information Destruction organic revenues declined $12.2 million or 6% compared to the first quarter of 2023. In the first quarter, recycling paper revenues were down approximately 7% or $14.3 million due to lower RISI rates affecting sorted office paper pricing and lower tonnage. We continue to see headwinds in service stops with our national customers, driven by recent losses of mostly low-margin stops with existing customers and site closures. In the quarter, service revenues were up approximately 1% or $2.1 million, mainly driven by the recycling recovery surcharge. As a reminder, when sorted office paper prices are below $192 a ton, we are able to offset approximately 60% of the reduction in paper prices with our recycling recovery surcharge.
Looking year-over-year, we were able to offset approximately 40% of the reduction as the average sorted office paper price in the first quarter of 2023 was over $220 a ton. Our International Secure Information Destruction organic revenues decreased $2.2 million or 8.4% compared to the first quarter of 2023 mainly due to lower commodity index revenues. Income from operations in the first quarter was $38.9 million compared to $40 million in the first quarter of 2023. The $1.1 million decrease was mainly due to lower Secure Information Destruction commodity index revenues and the corresponding margin flow-through impact of $11.9 million higher adjusting items of $6.9 million and higher bad debt expense of $3.8 million, mainly due to a lower first quarter of 2023 bad debt expense level as a result of improved North America Secure Information Destruction collection.
These decreases were partially offset by cost savings and margin flow-through of $14.8 million and lower incentive and stock-based compensation of $5.5 million. Net income was $13.1 million or $0.14 diluted earnings per share compared to $11.2 million or $0.12 diluted earnings per share in the first quarter of 2023. The $1.9 million increase was mainly due to lower interest expense of $2 million, partially offset by lower income from operations, as I just explained. Cash from operations for the three months ended March 31st, 2024, was an outflow of $54.5 million compared to an inflow of $49.5 million in the same period of 2023. The year-over-year decrease of $104 million was mainly due to an increase in accounts receivable, net of deferred revenues of $63.1 million due to expected billing and collection delays from the regulated waste ERP launch in September 2023, higher annual incentive plan payments of $17.1 million and other net working capital changes of $23.8 million.
In the beginning of the first quarter, we experienced a continuation of accounts receivable trends that we discussed on the fourth quarter call. As a reminder, these trends were mainly driven by the timing of US regulated waste customer billings and collections due to the ERP implementation as we held some invoices for our largest customers to ensure accuracy or meet complex customer invoicing requirements. Beginning in March, accounts receivable balances started to stabilize, and we started to see improvement in collections in April. Adjusted income from operations was $90.5 million or 13.6% as a percentage of revenues, up from $84.7 million or 12.4% as a percentage of revenues in the first quarter of 2023. Adjusted income from operations increased 120 basis points as a percentage of revenues mainly due to cost savings and margin flow-through of 230 basis points, lower incentive and stock-based compensation of 80 basis points and the impact of divesting lower-margin businesses of 40 basis points.
This increase was partially offset by lower Secure Information Destruction commodity index revenues and the corresponding margin flow-through impact of 180 basis points and higher bad debt expense of 60 basis points as explained. As noted on Slide 10, adjusted diluted earnings per share was $0.57 compared to $0.49 in the first quarter of 2023. Excluding the positive impact from divesting lower-margin businesses of $0.01, the remaining $0.07 year-over-year increase was driven by, one, cost savings and margin flow-through of $0.11, two, lower taxes, interest and other are $0.04, and three, lower incentive and stock-based compensation of $0.04. These were partially offset by lower Secure Information Destruction commodity index revenues of $0.09 and lower bad debt expense of $0.03.
Capital expenditures for the three months ended March 31st, 2024 were $43.1 million compared to $36.4 million for the same period last year. Free cash flow for the first quarter was an outflow of $97.6 million compared to an inflow of $13.1 million in the same period of 2023. As noted on Slide 9, the year-over-year decline of approximately $110.7 million was mainly due to lower cash from operations of the $104 million and higher capital expenditures of $6.7 million. As mentioned on the fourth quarter call and in line with our expectations, we expected a use of cash in the first quarter as it includes our annual incentive compensation payouts, the semiannual debt interest payments and the timing of accounts receivable collections. As shown on Slide 11, at the end of the first quarter, our credit agreement-defined debt leverage ratio was 3.51 times and aligned with our expectations.
The amended credit agreement allows for certain cash add-backs when calculating the credit agreement-defined debt leverage ratio with $50 million of such add-backs that expired at the end of 2023. Expiration of these add-backs, which was anticipated, increased the credit agreement-defined debt leverage ratio by approximately 30 points in the first quarter of 2024. We expect to return to our long-term range of 2.5 to 3 times later this year. I will now turn the call back to Cindy.
Cindy Miller: Thank you, Janet. One of Stericycle's core values is that we embrace diversity and inclusion, aligning with this core value, I'm very excited to share that we were recently recognized by Newsweek as one of America's greatest workplaces for diversity and for women. We received the highest rating for offering a diverse and inclusive work environment, and celebrating the role that diversity plays in driving activity, innovation and organizational success. As always, I'd like to thank our customers, team members and the communities we serve and our shareholders for their continued trust in having Stericycle protect what matters. Operator, please open the line for Q&A.
See also
15 Countries with English as Official Language in the World and
15 Best Cheap Stocks To Buy For 2024.
To continue reading the Q&A session, please click here.
